What is an index ? By Suki Chung

What is an Index ? The basic definition of an index is: "a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market."

What is the DJIA, or the DOW ? Created By: Charles Dow on May 26, Currently maintained by Dow Jones & Company.Dow Jones & Company Number of Companies: Originally 12, there are 30 today. Types of Companies: Various, the DJIA covers all major areas of the U.S. economy except the transportation and utility sectors. Selection Criteria: Selection is at the discretion of The Wall Street Journal editors. Reviewed as needed. How it's Calculated: The original DJIA was simply an average of stock prices. Today it uses a price weighted system.

About the Dow…. Advantages: The DJIA has weathered the test of time. It contains 30 of the most familiar blue chip companies in the U.S.blue chip Disadvantages: There are well over 10,000 public companies in the United States. Being only composed of 30 companies the DJIA does not even come close to being a benchmark for the entire market.

Price-Based Weighting In this system, the weight of each security is the stock's price relative to the sum of all the stock prices. The problem with priced-based weighting is that a stock split changes the weight of a company in the index even though there is no fundamental change in the business.stock split For this reason, not too many indexes are weighted on price.

S&P 500 Created By: Standard and Poor's Index ServicesStandard and Poor's Index Services Number of Companies: 500 Types of Companies:The S&P 500 tries to cover all major areas of the U.S. Economy. They are the most widely held 500 companies chosen with respect to market size, liquidity, and their industry.liquidity Selection Criteria: Components are chosen by the S&P Index Committee. How it's Calculated:The S&P 500 is a market- capitalization weighted index. This means every stock in the index is represented in proportion to its market capitalization.

About the S&P….. Advantages: The S&P 500 is one of the best benchmarks in the world for large-cap stocks. By containing 500 companies it has great diversification, and accounts for around 70% of the U.S. market.diversification Disadvantages: The top 45 companies comprise more than 50% of the index's value. Another disadvantage is there is very little foreign content.

The Nasdaq Created By: The NASD in 1971Number ofNASD Companies:4000+ Types of Companies: Contains all of the companies that trade on the Nasdaq. Selection Criteria: If a stock trades on the Nasdaq, it is included in the index. How it's Calculated: The Nasdaq Composite is a capitalization-weighted index with each company weighting being proportionate to its market value.

About the Nasdaq… Advantages: The Nasdaq Composite is heavily weighted in technology and Internet stocks. As such, the companies listed in the composite are considered to have high growth potential. Disadvantages: Companies on the Nasdaq tend to be more speculative and risky than those listed on the NYSE. Because of this, the Nasdaq composite index is much more volatile than other broad indexes.volatile

The Wilshire 5000 Created By: Wilshire Associates in 1980.Wilshire Associates Number of Companies: Over 6500 Types of Companies: There is no discrimination by industry. It includes all New York Stock Exchange, and most of the Nasdaq and Amex issues. Selection Criteria: All U.S. headquartered equity securities with readily available price data are included. How it's Calculated: The Wilshire Total Market Index is market-capitalization weighted.

About the Wilshire…. Advantages: Easily the most diversified index in the world, it pretty much covers all of the public companies in the United States. Disadvantages: It is also similar to the S&P 500 where the top 10% of the companies in the index make up for over 75% or so of the index's value.

The Russell 2000 Created By: Frank Russell Company in 1972 Number of Companies: 2000 Types of Companies: Small-cap companies from various industries. Exclusions are stocks under $1 and pink sheets. pink sheets Selection Criteria: It consists of the smallest 2000 companies in the Russell 3000 index. How it's Calculated: The Russell 2000 is weighted on market capitalization.

About the Russell …. Advantages: A well diversified index for smaller companies which have great growth potential. Disadvantages: The Russell is very streaky. When small caps come into favor with investors it tends to perform very well. But, the index can be stuck in the doldrums for years when small caps are languishing.

To End…. Pick the right index to bench with !!!!!!!